Insights for consumers and participants
Insurance policies do not usually transfer automatically when a business is sold. Completing application forms and providing requested information is often a necessary step before cover can begin. Until cover is confirmed, new business owners should assume they are uninsured and take steps to address any gap in cover.
What happened?
Amy* purchased a business and, shortly before the settlement date, contacted the seller’s insurance broker to ask if the existing insurance could be transferred to her company.
The broker explained that Amy would need to complete a new declaration and provide further information before insurance could be arranged. The broker also sent a questionnaire for her to complete. Amy confirmed the business address but did not return the questionnaire or declaration.
A few days later, a fire caused extensive damage to the business premises and equipment. The losses exceeded $200,000, including business interruption costs.
Amy discovered there was no insurance cover in place and complained that the broker should have told her she was uninsured. She said the broker knew the business was being sold to her and had created the impression that the seller’s insurance would continue or be transferred to her.
Amy complained and asked FSCL to require the broker to compensate her for her losses.
Did the broker breach their duty of care?
Insurance brokers have a duty to exercise reasonable care and skill when arranging insurance and must comply with professional conduct standards.
The key question was whether the broker’s communications to Amy created a reasonable expectation that insurance cover was already in place or was being arranged on Amy’s behalf.
We found the broker had made it clear that additional information and completed documentation were required before any cover could be arranged. Emails sent to Amy referred to the need for a new declaration and other steps that had to be completed before cover could be “finalised”. Amy did not complete those steps.
Although some of the broker’s language could have been clearer, when the communications were read as a whole, they did not indicate that insurance was already in place. References to the previous owner’s cover were simply providing information about the seller’s policy, and did not reasonably amount to a representation that cover had been transferred or put in place for Amy.
Did the broker have a duty to warn Amy that she was uninsured?
Amy argued that the broker should have expressly warned her that she was operating without insurance. We disagreed. Amy was not an existing client of the broker. They had no ongoing advisory relationship. She had not received confirmation that cover had been placed, and she had not completed the information required for the broker to place cover.
Brokers must avoid misleading clients about whether cover exists, but there is no general duty to warn a prospective client that they are uninsured where the process of applying for cover is underway.
Importantly, there was no evidence the broker had told Amy that cover was in place or that it was safe to operate without completing the remaining steps for arranging insurance cover.
The business owner is responsible for ensuring a business has insurance unless a broker has been instructed to complete a specific task and fails to do so, or provides incorrect advice.
Even if the broker knew the settlement date from the seller, that did not transfer responsibility for arranging cover from Amy to the broker. Amy had approached the broker shortly before settlement, had been told what information was needed, and did not provide it before the fire occurred.
Outcome
We did not uphold the complaint. The broker had not breached their duty of care, had not created a reasonable expectation that insurance cover existed, and had no obligation to compensate Amy for the losses arising from the fire. Although the outcome was unfortunate, it would not be fair or reasonable to hold the broker responsible for the absence of insurance cover.
